Japan Sources More Gas from North America as Export Terminal Projects Move Ahead

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Researched by Industrial Info Resources (Sugar Land, Texas)--Japan is the world's largest consumer of liquefied natural gas (LNG). The island nation is also almost entirely dependent on imports to meet its demand. In order to protect against supply interruptions, Japan imports from a wide range of producer countries in the Middle East, Southeast Asia, Europe and North America. In 1995, the United States supplied 3% of Japan's gas. By 2010, this figure had shrunk to 1%, coinciding with a period in which the U.S. began to look at importing gas itself to meet domestic demand. The U.S. has always supplied gas in short-term or spot deals. However, with recently signed long-term supply contracts between Japanese consumers and American exporters, the U.S. stands ready to supply as much as 8% of Japan's natural gas after 2017.

Traditionally, Japan has sourced the majority of its LNG through long-term contracts with companies and projects in eight supplier nations: Qatar, Oman, the United Arab Emirates (specifically Abu Dhabi), Australia, Malaysia, Brunei, Russia and Indonesia. However, in 2012, four major Japanese companies, Osaka Gas Company Limited (TYO:9532) (Osaka, Japan), Tokyo Gas Company Limited (TYO:9531) (Tokyo), Chubu Electric Power Company Incorporated (TYO:9502) (Nagoya, Japan) (Chuden) and Sumitomo Corporation (TYO:8053) (Tokyo) have signed long-term LNG purchase contracts from two in-progress LNG export terminals.

Dominion Resources Incorporated (NYSE:D) (Richmond, Virginia) signed an agreement with Tokyo Gas and Sumitomo to supply 2.3 million tons per annum for 20 years to the two Japanese companies, once the liquefaction plant addition at their existing Cove Point import terminal is complete sometime in 2017. Similarly, Freeport LNG Expansion Liminted Partnership (Freeport LNG), a partnership under the management of ConocoPhillips (NYSE:COP) (Houston), signed a deal with Osaka Gas and Chuden in July to supply the two Japanese firms with the 4.4 million tons per annum that would be produced from the first train at their proposed LNG liquefaction and loading facility near Freeport, Texas, which is slated to be complete by the end of 2016. Between these two deals, the U.S. is committed to supplying roughly 6.7 million tons per annum of LNG to Japan, roughly 8% of Japan's LNG imports in 2012.

Since the March 11, 2011, Great East Japan Earthquake and Tsunami disaster, Japan has lost the use of the vast majority of its nuclear power generation capacity, which represented approximately 35% of the country's energy mix. As a result, the country experienced rolling blackouts for weeks until consumers were able to cut back on their electricity use and power companies were able to increase capacity enough to compensate. Since then, Japan's power companies have turned to fossil fuel sources to compensate for the lost nuclear capacity. According to the Japanese government's estimates, nuclear power costs roughly 8.9 yen per kilowatt hour (kWh), making it a very cheap source of energy. Comparatively, coal costs 10.3 yen/kWh, LNG costs 10.9 yen/kWh, and oil costs 38.9 yen/kWh. Though coal is more cost-effective, it also has much higher carbon emissions when burned in conventional power plants; thus, the dramatically lower-carbon-emitting LNG has been chosen as the fuel source of choice. As such, LNG imports rose from more than 70 million metric tons in 2010 to more than 83 million metric tons in 2011, and are expected to continue to rise in the coming years.

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